Looks to me like these lines:
Code:
{if $image_x ne 0} width="{$image_x}"{/if}
{if $image_y ne 0} height="{$image_y}"{/if} alt="{$product|escape}" title="{$product|escape}" />
Should read:
Code:
{if $notlazy}
{if $image_x ne 0} width="{$image_x}"{/if}
{if $image_y ne 0} height="{$image_y}"{/if} alt="{$product|escape}" title="{$product|escape}" />
{/if}